M/S. SWASTIK COAL CORPORATION PVT. LTD.,INDORE vs. THE ACIT, 5(1), INDORE

आदेश / O R D E R

PER KUL BHARAT, J.M: This appeal by the assessee is directed against order of the Ld. Pr. Commissioner of Income Tax-2, Indore dated

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] 22.3.2018 pertaining to the assessment year 2014-15. The assessee has raised following grounds of appeal:

1. “In the facts and in the circumstances of the case, Ld. Pr. CIT-2, Indore erred in invoking the provisions of section 263 of the Act and passing the order therein by holding that order passed by Ld. Assessing Officer under section 143(3) of the Act is erroneous and prejudicial to the interest of the revenue, which is illegal, bad in law and devoid of any merit.

2. In the facts and in the circumstances of the case, Ld. Pr. CIT-2, Indore erred in invoking the proceedings under section 263 by holding that Ld. Assessing Officer did not refer the case to Transfer Pricing Officer (TPO) to verify whether the specified domestic transactions were at arm’s length price or not. 3. In the facts and in the circumstances of the case, Ld. Pr. CIT-2, Indore erred in observing for the purpose of passing order under section 263 of the Act the assessment order has been passed without making necessary enquiries and investigations. 4. In the facts and in the circumstances of the case, Ld. Pr. CIT-2, Indore erred in setting aside the order to the file of Ld. Assessing Officer with a direction to the Ld. Assessing Officer to refer the large specified domestic transactions mentioned in Form 3CEB to the TPO and pass a fresh assessment order though limiting it to the issue of large specified domestic transactions only. 5. The appellant craves leave to add, amend, alter or otherwise raise any other ground of appeal

.”

2. Briefly stated facts are that the assessment u/s 143(3) of the Income Tax Act, 1961 (hereinafter called as ‘the Act’) was framed vide order dated 29.9.2016 assessing the total income at Rs.17,47,35,360/-. Subsequently, the Ld. Pr.

CIT from the records observed that the assessee had made

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] specific domestic transactions as it had made purchases from the parties covered u/s 40A(2)(b) of the Act. It was observed that the A.O. did not refer the case to the Transfer Pricing Officer to verify whether the transactions were at Arm’s Length Price or not. Hence, the Ld. Pr. CIT after examining the records was of the view that the assessment order was erroneous in so far as it was prejudicial to the interest of the revenue. The Ld. Pr. CIT therefore, issued a show cause notice u/s 263 of the Act calling upon the assessee as to why the assessment order should not be revised. In response to the same, the assessee filed a detailed submission, which was not found acceptable by the Ld. Pr. CIT. Therefore, the Ld. Pr. CIT set aside the assessment order and directed the A.O. to make fresh assessment order in accordance with law.

3. Aggrieved by this, the assessee is in present appeal before this Tribunal. Ld. Counsel for the assessee

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] reiterated the submissions as made in the written submissions. The submissions of the assessee are as under:

“Submission:

A. Provisions of section 263 can be invoked only when the twin conditions are satisfied i.e. order should be both erroneous and prejudicial to the interest of the Revenue.

b. Shree Ganpatlal Onkarlal Agrawal and Company: It is a partnership firm. On reference to the return filed for the impugned

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] year it is evident that it is taxable at maximum rate of 30%. There is no tax arbitrage. [PB 22-24] c. Vishnu Prasad Bindal: Assessee is an individual. On reference to the return filed for the impugned year it is evident that he is taxable at maximum rate of 30%. There is no tax arbitrage. [PB 25-28] d. Narayan Bindal: Assessee is an individual taxable at maximum rate of 30%. There is no tax arbitrage. e. Hitesh Bindal: Assessee is an individual. On reference to the return filed for the impugned year it is evident that he is taxable at maximum rate of 30%. There is no tax arbitrage. [PB 29-32] f. Geeta Devi Bindal: Assessee is an individual. On reference to the return filed for the impugned year it is evident that she is taxable at maximum rate of 30%. There is no tax arbitrage. [PB 33-36] g. Arpita Bindal: Assessee is an individual taxable at maximum rate of 30%. There is no tax arbitrage.

4. The transaction entered with ARKA Carbon Fuels Private Limited has already been assessed and no upward adjustment has been made by Ld. TPO. For the transactions entered with all the other parties also there is no loss of revenue to the Department as all have been taxed at the maximum rate of 30%. There is no tax arbitrage.

5. One of the twin conditions for invoking the provisions of section 263 i.e. prejudicial to the interest of Revenue is not satisfied. Thus, provisions of section 263 cannot be invoked. Order passed by Ld. Pr. CIT -2, Indore u/s 263 has no legal sanctity.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] a. Hon’ble Jurisdictional High Court of Madhya Pradesh in the case of H.H. Maharaja Raja Pawer Dewas – [1983] 15 Taxman 363 – order pronounced on 13.11.1981 – Para 10 – “However, the first argument, viz., that an assessment order without compliance with the procedure laid down in section 144B is erroneous but not prejudicial to the interests of the revenue conferring revisional jurisdiction on the Commissioner under section 263(1), has force. Under section 263(1) two pre-requisites must be present before the Commissioner can exercise the revisional jurisdiction conferred on him. First is that the order passed by the ITO must be erroneous. Second is that the error must be such that it is prejudicial to the interests of the revenue. If the order is erroneous but it is not prejudicial to the interests of the revenue, the Commissioner can not exercise the revisional jurisdiction under section 263(1)………………..There cannot be any prejudice to the revenue on account of the ITO's failure to follow the procedure prescribed under section 144B, and unless the prejudice to the interests of the revenue is shown, the jurisdiction under section 263(1) cannot be exercised by the Commissioner, even though the order is erroneous. The argument that such an order may possibly be challenged in appeal by the assessee, and for this reason it is prejudicial to the interests of the revenue, has no merit. Section 263(1) clearly contemplates that the order of assessment itself should be prejudicial to the interests of the revenue and this prejudice has to be proved by reference to the assessment order only. It cannot be argued that there is some possibility of the assessment order being challenged or revised in appeal and, therefore, on account of this contingency, the order becomes prejudicial to the interests of the revenue.” [emphasis supplied] b. Hon’ble Apex Court in the case of Malabar Industrial Co. Ltd. – [2000] 243 ITR 83 – order pronounced on 10.02.2000 – HEAD NOTE – "Section 263 of the Income-tax Act, 1961 - Revision - Of orders prejudicial to interests of revenue - Assessment year 1983-84 - Whether in order to invoke section 263 Assessing Officer's order must be erroneous and also prejudicial to revenue and if one of them is absent, i.e., if order of Income-tax Officer is erroneous but is not [ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] prejudicial to revenue or if it is not erroneous but is prejudicial to revenue, recourse cannot be had to section 263(1) - Held, yes - Whether if due to an erroneous order of ITO, revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to interests of revenue - Held, yes - Assessee-company entered into agreement for sale of estate of rubber plantation - As purchaser could not pay instalments as scheduled in agreement, extension of time for payment of instalments was given on condition of vendee paying damages for loss of agricultural income and assessee passed resolution to that effect - Assessee showed this receipt as agricultural income - Resolution passed by assessee was not placed before Assessing Officer - Assessing Officer accepted entry in statement of account filed by assessee and accepted same - Commissioner under section 263 held that said amount was not connected with agricultural activities and was liable to be taxed under head 'Income from other sources' - Whether, where Assessing Officer had accepted entry in statement of account filed by assessee, in absence of any supporting material without making any enquiry, exercise of jurisdiction by Commissioner under section 263(1) was justified - Held, yes c. Hon’ble Gujarat High Court in the case of Smt. Minalben S. Parikh – [1995] 215 ITR 81 – order pronounced on 17.10.1994 – Para 12 – “From the aforesaid, it can well be said that the well-settled principle in considering the question as to whether an order is prejudicial to the interests of the revenue or not is to address oneself to the question whether the legitimate revenue due to the exchequer has been realised or not or can be realised or not if his orders under consideration are allowed to stand. For arriving at this conclusion, it becomes necessary and relevant to consider whether the income in respect of which tax is to be realised, has been subjected to tax or not or if it is subjected to tax, whether it has been subjected to tax at a rate at which it could yield the maximum revenue in accordance with law or not. If income in question has been taxed and legitimate revenue due in respect of that income had been realised, though as a result of erroneous order having been made in that respect, in our opinion, the Commissioner cannot exercise

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] powers for revising the order under section 263 merely on the basis that the order under consideration is erroneous. If the material in that regard is available on the record of the assessee concerned, the Commissioner cannot exercise his powers by ignoring that material which links the income concerned with the tax realization made thereon. The two questions are inter-linked and the authority exercising powers under section 263 is under an obligation to consider the entire material about the existence of income and the tax which is realizable in accordance with law and further what tax has in fact been realised under the alleged assessment orders.[emphasis supplied] d. Hon’ble Karnataka High Court in the case of V. G. Krishnamurthy – [1985] 20 Taxman 65 – order pronounced on 19.03.1984 – Para 10 – “Section 263 can be invoked by the Commissioner only when he prima facie finds that the order made by the ITO was erroneous and was prejudicial to the interests of the revenue. Both these factors must simultaneously exist. An order that is erroneous must also have resulted in loss of revenue or prejudicial to the interests of the revenue. Unless both these factors co-exist or exist simultaneously, the Commissioner cannot invoke or resort to section 263. It cannot be exercised to correct every conceivable error committed by an ITO. Before the suo moto power of revision can be exercised, the Commissioner must at least prima facie find both the requirements of section 263, namely, that the order sought to be revised is prima facieerroneous and prejudicial to the interests of the revenue. If one of the other factor was absent, the Commissioner cannot exercise the suo moto power of revision under section 263.” [emphasis supplied] 7. In the instant case though the assessment order at best may be considered erroneous but it is not prejudicial to the interest of the Revenue. Since the twin conditions are not satisfied the impugned order is ought to be quashed.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] B. Omission of a provision from the Income Tax Act, 1961.

In the instant case, assessee company had entered into Specified Domestic Transaction only. No international transactions were entered into. Assessee company was governed by provisions of Section 92BA(i) only. 9. Provisions of section 92BA(i) has been omitted w.e.f. 01.04.2017. It is settled principle that where a provision is omitted it should be deemed to have never been part of the statute at any point of time. Effect of omission is different from repeal.

Reliance is placed on the decision of Hon’ble Apex Court in the case of General Finance Co. – [2002] 124 Taxman 432 – order pronounced on 04.09.2002 – HEAD NOTE – “Section 276DD of the Income-tax Act, 1961, read with article 227 of the Constitution of India - Offence and prosecution - Failure to comply with provisions of section 269SS - Assessment year 1986-87 - Appellant received deposits from certain persons in year 1985 in violation of provisions of section 269SS - Department initiated proceedings against assessee by filing a complaint under section 276DD on 31-3-1989 - Appellant sought quashing of prosecution proceedings contending that prosecution could not be continued nor could punishment be imposed under section 276DD after it was omitted on and from 1-4-1989 and that section 6 of General Clauses Act, 1897 was inapplicable - Whether principle underlying section 6 of General Clauses Act as saving right to initiate proceedings for liabilities incurred during currency of Act would not apply to [ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] omission of a provision in an Act but only to repeal, omission being different from repeal - Held, yes - Whether since section 276DD stood omitted from Act but not repealed, a prosecution could not have been launched or continued by invoking section 6 of General Clauses Act after said omission and, therefore, proceedings against appellant had to be quashed - Held, yes”

Considering the above facts, circumstances of the case, submissions made, documents on record and judicial precedence, appeal of the assessee be allowed.”

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] Ld. CIT(DR) further submitted that there is no whisper in the order that the A.O. has made any effort to find out about the arm’s length price and the transactions between the assessee and the persons covered u/s 40A(2)(b) of the Act. Ld. CIT(DR) further submitted that non-adherence to the mandate of law would certainly make the order of the A.O. erroneous and also prejudicial to the interest of the revenue.

CIT is that transfer pricing related issues were not examined by the A.O. since the transaction carried out by the assessee are covered under specific domestic transactions. The contention of the assessee is that Ld. Pr.

CIT ought not to have invoked the provisions of section 263

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] of the Act as in the present case, major transactions were carried out with M/s. ARKA Carbon Fules Pvt. Ltd. (Associate Enterprise). This company had already been assessed and transfer pricing officer (in short ‘TPO’) passed an order of no adjustment required in the arm’s length price. Therefore, no prejudice is caused to the revenue. It is vehemently argued on behalf of the assessee that no evasion of tax at all happened as all the persons covered u/s 40A(2)(b) of the Act with whom transactions were executed are subjected to the highest rate of tax. It is further contended that law is well settled for invoking the provisions of section 263 of the Act, two ingredients are required to be satisfied i.e. order should be erroneous and so far as it is prejudicial to the interest of the revenue.

There is no ambiguity so far law is concerned, it has been held in catena of judgements that what are the conditions when the assessment order can be termed as erroneous

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] and also prejudicial to the interest of the justice. The word ‘erroneous and prejudicial’ has been exhaustively examined by the Hon'ble Supreme Court in the case of CIT Vs. Malabar Industrial Co. Ltd. (2000) 243 ITR 83. The Hon'ble Court has held as under:

“A bare reading of this provision makes it clear that the prerequisite to exercise of jurisdiction by the Commissioner suo moto under it, is that the order of the Income-tax Officer is erroneous insofar as it is prejudicial to the interests of the revenue. The Commissioner has to be satisfied of twin conditions, namely, (i). the order of the Assessing Officer sought to be revised is erroneous; and (ii) it is prejudicial to the interests of the revenue. If one of them is absent -- if the order of the Income-tax Officer is erroneous but is not prejudicial to the revenue or if it is not erroneous but is prejudicial to the revenue-- recourse cannot be had to Section 263(1) of the Act. There can be no doubt that the provision cannot be invoked to correct each and every type of mistake or error committed by the Assessing Officer; it is only when an order is erroneous that the section will be attracted. An incorrect assumption of facts or an incorrect application of law will satisfy the requirement of the order being erroneous. In the same category fall orders passed without applying the principles of natural justice or without application of mind. The phrase “prejudicial to the interests of the revenue” is not an expression of art and is not defined in the Act. Understood in its ordinary meaning it is of wide import and is not confined to loss of tax. The High Court of Calcutta in Dawjee Dadabhoy & Co. Vs. S.P. Jain and Another [31 ITR 872], the High Court of Karnataka in Commissioner of Income- tax, Mysore Vs. T. Narayana Pai [98 ITR 422], the High Court of Bombay in Commissioner of Income-tax Vs. Gabriel India Ltd. [203 ITR 108] and the High Court of Gujarat in Commissioner of Income-tax Vs. Smt. Minalben S. Parikh [215 ITR 81] treated loss of tax as prejudicial to the interests of the revenue.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] Mr. Abaraham relied on the judgment of the Division Bench of the High Court of Madras in Venkatakrishna Rice Company Vs. Commissioner of Income-tax [163 ITR 129] interpreting prejudicial to the interests of the revenue. The High Court held, In this context, it must be regarded as involving a conception of acts or orders which are subversive of the administration of revenue. There must be some grievous error in the Order passed by the Income-tax Officer, which might set a bad trend or pattern for similar assessments, which on a broad reckoning, the Commissioner might think to be prejudicial to the interests of Revenue Administration. In our view this interpretation is too narrow to merit acceptance. The scheme of the Act is to levy and collect tax in accordance with the provisions of the Act and this task is entrusted to the Revenue. If due to an erroneous order of the Income-tax Officer, the revenue is losing tax lawfully payable by a person, it will certainly be prejudicial to the interests of the revenue. The phrase prejudicial to the interests of the revenue has to be read in conjunction with an erroneous order passed by the Assessing Officer. Every loss of revenue as a consequence of an order of Assessing Officer cannot be treated as prejudicial to the interests of the revenue, for example, when an Income-tax Officer adopted one of the courses permissible in law and it has resulted in loss of revenue; or where two views are possible and the Income-tax Officer has taken one view with which the Commissioner does not agree, it cannot be treated as an erroneous order prejudicial to the interests of the revenue unless the view taken by the Income-tax Officer is unsustainable in law. It has been held by this Court that where a sum not earned by a person is assessed as income in his hands on his so offering, the order passed by the Assessing Officer accepting the same as such will be erroneous and prejudicial to the interests of the revenue. Rampyari Devi Saraogi Vs. Commissioner of Income-tax [67 ITR 84] and in Smt. Tara Devi Aggarwal Vs. Commissioner of Income-tax, West Bengal [88 ITR 323] (SC).”

6. If we apply the ratio held down by the Hon'ble Apex Court in the case of Malabar Industrial Co. Ltd. (supra) on the facts of the present case there would not be any infirmity into the order of Ld. CIT(A) in holding that assessment order is erroneous if it is found that the A.O.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] has not followed the mandate of law. It is also to be examined what prejudice would be caused if such mandate of law was not followed by the A.O. There is no dispute with regard to the fact that transaction in question fall under the category of ‘specified domestic transaction’. In terms of section 40A(2)(b) of the Act it has to be examined whether such transactions are within the arm’s length price (in short ‘ALP’). The moot question is whether the A.O. is authorised by law to examine and compute arm’s length price related to ‘specified domestic transactions’.

Let us examine the law on this point. The Ld. Pr. CIT is of the view that the A.O. is under obligation to refer the issue to the Transfer pricing officer (in short ‘TPO’) for computing the ALP. In the absence of the ALP computed by the TPO, the A.O. could not have adjudicated the issue. There is no ambiguity so far provision of law are concerned where there is specified transaction, the A.O. is under statutory

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] obligation under proviso to section 92CA(1) of the Act and Rule framed there under, the issue was required to be referred to the TPO. Now the question would arise whether the A.O. is duty bound to accept the adjustment, if any made by the TPO or otherwise he has some discretion under law whether to accept or not the adjustment proposed by the TPO. The Ld. Pr. CIT has referred the CBDT instructions No.3 of 2016 dated 10.3.2016 and explanation No.2 to section 263 of the Act to answer this question. There is also another aspect of the matter that the transaction of sale and purchase has two limbs namely sale and purchase. The sale of one party would be purchase of another or vice versa. The underlined fact remains in such transaction is that it is between the two related or associated parties. Hence, the transaction is not free. It is under some influence or control. If the transaction is not attached with any other motive or is not [ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] used as a device to avoid taxability of profit or gain, then there would have been no need to find out the arm’s length price of such transaction. But where it is used as a tool to avoid the taxability, then certainly in depth examination of the ALP would be needed. If in a given case sale is found to be within the ALP determined by the TPO, under such situation whether still there would be need to examine the ALP of purchases? This question has to be decided on the basis of the factual aspect of the matter. We find no finding on this issue. We are of the view that this aspect in the present case should have been examined. It is contended by the Ld. Counsel for the assessee that assessee had entered into ‘specified domestic transactions’ but not in international transactions. Thus, the transaction would be governed by the provisions of section 92BA(1) of the Act. It is further pointed out that the provisions of section 92BA(1) of the Act has been omitted

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] w.e.f. 1.4.2017. It is vehemently argued that the impact of omission of this provision would be that it has to be construed that such provision was never on the statute book. He contended that it is a settled principle that where provision is omitted, it should be deemed to have never been part of the statute at any point of time. The reliance is placed on the decision of the Hon'ble Apex Court rendered in the case of General Finance Company Vs. ACIT (2002) 124 Taxman 432 (SC). There is merit into this contention as the Hon'ble Apex court has referred to the Judgements by the Hon'ble constitutional bench of the Supreme Court rendered in the case of Kolhapur Cane Sugar Works Limited Vs. UOI (2000) (2) SCC 536. The Hon'ble Apex court in General Finance Company Vs. ACIT (supra) after considering the submissions of the Ld. Counsel for the revenue in that case held as under:

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] “8. Though we find the submissions of the learned counsel to be forceful, we are constrained to follow the two decisions of the Constitution Benches of this Court in Rayala Corpn. (P) Ltd.’s case (supra) and Kolhapur Canesugar Works Ltd.’s case (supra). This view has held that field for over three decades and reiterated even as late as two years ago. Non-compliance with section 269SS attracted prosecution as well as penalty. Omission of the provision regarding prosecution will not affect the levy of penalty. The advantage arising out of application of the ratio of the two decisions resulting in prosecution in cases of non-compliance with section 269SS is only transactional affecting a few cases arising prior to 1.4.1989. Such cases may be few and far between. Hence, we find this is not an appropriate case for reference to the larger Bench.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore]

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] 8. We find that the above view of the Ld. Pr. CIT is not correct. In view of the aforesaid discussion, moreover, the coordinate bench has also examined the issue in the case of Texport Overseas Pvt. Ltd. in IT(TP)A No.1722/Bang/2017. Admittedly, in this case, the order has been revised purely on the basis that the assessing officer has not referred to determine the arm’s length price to the TPO. Since the provision itself stood omitted at the time when the order was passed by the Ld. Pr. CIT, under these undisputed facts in the light of the Judgement of the Hon'ble Supreme Court rendered in the case of General Finance Company (supra) as well as the order of the coordinate bench rendered in the case of Texport Overseas Pvt. Ltd. (supra), the impugned order cannot be sustained, hence is hereby quashed. The order impugned is thus quashed and the grounds raised in the appeal are allowed.

[ITA 486/Ind/2018] [Swastik Coal Corporation Pvt. Ltd., Indore] 9. In the result, the appeal filed by the assessee in ITA No.486/Ind/2018 for the A.Y. 2014-15 is allowed.

Order was pronounced in the open court on 26.07.2019.